Download - CVP Analysis Final
Marginal Costing and Cost-Volume-Profit Analysis (CVP)
References: M.N.Arrora -Cost and Management
Accounting Khan and Jain-Management
Accounting Accounting for Management-Dr.
Jawahar Lal Management Accounting-I.M.Pandey Cost Accounting for Business
Managers-Ashish K Bhattacharyya
What is cost and Total cost? Cost-Amount incurred to get
something/ resources used for the production of goods and services
Total Cost-is the total cost of producing unit of product. It is the total of all variable cost and fixed cost incurred to produce the goods.
Variable
Fixed
Mixed
Types of Costs
Minutes Talked
To
tal L
on
g D
ista
nce
Tel
eph
on
e B
ill variable costs change
when activity/unit changes.
Your total long distancetelephone bill is basedon how many minutes
you talk.
Variable Cost
Minutes Talked
Per
Min
ute
Tel
eph
on
e C
har
ge
Variable costs per unit do not changeas activity/unit increases.
The cost per long distance
minute talked is constant.
For example, Rs.7 per minute.
Variable Cost Per Unit
Variable Costs Example
Consider Indian Railway. Assume that Tea costs in Indian
Railway Rs.3 per person. If the railway carries 2,000
passengers, it will spend Rs 6,000 for Tea services.
Variable Costs Example
0 1 2 3 4 5
24 –
18 –
12 –
6 –
– – ––
Volume(Thousands of passengers)
Tot
al V
aria
ble
C
osts
(th
ousa
nd
s)
Number of Local Calls
Mo
nth
ly B
asic
T
elep
ho
ne
Bill
Total fixed costs remain unchangedwhen activity changes.
Your monthly basic
telephone bill probably
does not change when
you make more calls.
Total Fixed Cost
Mixed Costs
Contain fixed portion that is incurred even when facility is unused & variable portion that increases with usage.
Example: monthly electric utility charge Fixed service fee Variable charge per kilowatt hour used
Total mixed cost
Variable
Utility Charge
Activity (Kilowatt Hours)
To
tal
Uti
lity
Co
st
Fixed Monthly
Utility Charge
Mixed Costs
Marginal Cost
Marginal Cost-is the cost of producing an additional unit of product. It is the total of all variable cost incurred to produce the extra one unit.
Marginal Costing Marginal Costing Technique is used for
short term decision-making. It assumes that fixed costs are not
affected by the decision to allocate resources to different activities.
Therefore, variable costs are the only relevant cost for decision making.
Marginal costing is also known as Variable costing and Direct Costing
Marginal Cost Statement
Sales- Variable Costs
Contribution - Fixed Costs
Profit
Example Mr.Thomas manufacture a device that
allows users to take a closer look at icebergs from a ship.
Expected price of the device Rs.1000 Variable costs are Rs700 per unit. He receive a proposal from a company
Tiggertol to sell 20,000 units at a price of Rs.850.
Contribution Margin Concept Example
There is sufficient capacity to produce the order.
How do we analyze this situation? Earning=Rs.850 – Rs.700 = Rs.150 Total Earning=Rs.150 × 20,000
units = Rs.30,00,000
Marginal Cost Statement
Sales (20,000 x Rs.850)Rs.1,70,00000
Variable costs (20,000 x Rs.700) (1,40,00000)Contribution margin
Rs.30,00000
If Fixed cost is Rs.40,00000.What will be his decision?
Cost-Volume-Profit Analysis
Cost-Volume-Profit Analysis (CVP)
CVP analysis is an extension of principles of marginal Costing
Cost-Volume-Profit Analysis (CVP) is the study of the relationship between selling prices, sales volumes, fixed costs, variable costs and profits at various levels of activity.
CVP analysis is used by the management in budgeting and profit planning.
CVP analysis is also known as Break even point Analysis
Assumptions of CVP/BEP Analysis Expenses can be classified as either
variable or fixed. Mixed cost have to be divided into
fixed and variable elements. Sales prices, unit variable cost, and
total fixed expenses will not vary. Synchronisation between
production and sales
Objective
Use CVP analysis to compute Contribution Profit Volume Ratio (P/V) Break Even Point Margin of Safety
Marginal Cost Statement
Sales- Variable Costs
Contribution - Fixed Costs
Profit
Contribution The contribution is calculated by following
formula:Contribution=Sales-Variable cost (C=S-V)Also, Contribution=Fixed cost + Profit
(C=F+P)Or Contribution=Fixed cost – Loss (C=F-L)From this the following marginal cost
equation is developedS-V = F+P
Example:
If Given Sales =Rs 12000 Variable Cost = Rs 7000 Fixed Cost =Rs. 4000Find out Contribution and Profit.
Example:
If Given Profit = Rs 1000 Contribution=Rs 5000 Variable Cost = Rs 7000Find out :-Sales and Fixed Cost
P/V ratio( Also Known as C/S ratio or Contribution Margin Ratio)
P/V ratio= Profit-volume ratio C/S= Contribution to Sales ratio This ratio denotes the percentage
of each sales rupee available to cover the fixed cost and to provide income to firm.
Computing P/V Ratio
P/V Ratio= Contribution Sales = C/S = (S-V)/SBy Transposition, we have(i) C=S X P/V ratio(ii) S= C P/V ratio
Example
Sales= Rs 10000 Variable Cost = Rs. 8000Then P/V Ratio = C/S = (S-V)/S =10000-8000 10000 = 20%
Alternative Formula
P/V ratio= Change in contribution Change in Sales = Change in Profit Change in sales
Example-P/V ratio
Year Sales Net Profit2009 20000 10002010 22000 1600
P/V Ratio = Change in Profit Change in Sales = 1600 – 1000 X 100 = 30% 22000-20000
The unique sales level at which a company earns neither a profit nor incurs a loss.
Profit = 0Sales – Total Cost = 0
Sales – Variable Costs – Fixed Costs = 0
What is Break-Even Point?
Break-Even Analysis
Break Even Analysis may be performed by the following two methods
a) Algebraic Calculationb) Graphic presentation
Algebraic Method-
Breakeven point in Sales Rupees = Fixed costs
P/V Ratio
Breakeven point in units = Fixed costs
Contribution per unit
Break Even Point Example
Sales Rs.100000 Variable cost Rs.70000 Fixed costs Rs.15000Required:
Compute the breakeven point (in Rupees)
Breakeven point is = Fixed costs P/V Ratio
= Rs.15000 30/100
= Rs 50000 Sales revenue at breakeven point = Rs.50000
Break Even Point Example
Selling price per unit Rs.12 Variable cost per unit Rs.3 Fixed costs
Rs.45000Required:
Compute the breakeven point (in units) and in Rupees
Breakeven point in units = Fixed costs Contribution per unit
= Rs.45000
Rs.12-Rs.3
= 5000 units
Sales revenue at breakeven point = Rs.12 * 5000 = Rs.60000
Target Profit Example
Suppose that our business would be content with Profit of _________________.(Target Profit)
How many units must be sold?
Formula
No. of units to be sold at target profit Fixed cost + Target profit
Contribution per unit=
Required sales revenue
Fixed cost + Target profit
Contribution to sales ratio=
Example
Selling price per unit Rs.12 Variable cost per unit Rs.3 Fixed costs Rs.45000 Target profit Rs.18000Required:
Compute the sales volume required to achieve the target profit
No. of units at target profit
Fixed cost + Target profit
Contribution per unit=
Rs.45000 + Rs.18000
Rs.12 - Rs.3=
= 7000 units
Required to sales revenue = Rs.12 *7000 = Rs.84000
Alternative method
Required sales revenue
Fixed cost + Target profit
Contribution to sales ratio=
Rs.45000 + Rs.18000
75%=
= Rs.84000
Units sold at target profit = Rs.84000 /Rs.12 = 7000 units
Problem:- The following data is given:Fixed Cost Rs. 12000Selling Price Rs. 12 per unitVariable Cost Rs. 9 per unitWhat will be the Amount of Sales if it is
desired to earn a profit ofa) Rs. 6000b) Rs 15000
Answer
a) Rs 72,000b) Rs. 1,08,000
Calculate the missing figures
Given Break –even point=Rs 30000Profit = Rs. 1500Fixed Cost = Rs.6000What is the amount of Variable cost?
Solution
Contribution=Fixed cost + Profit =6000 + 1500=7500Break-Even Point= Fixed Cost P/V Ratio
P/V Ratio=6000 x 100 = 20% 30000
P/V Ratio=Contribution/Sales Sales =7500 x 20/100 Sales = 37500Variable cost=Sales-Contribution =37500-7500 =30000
Problem:-
The following data is given:Fixed Cost Rs. 12000Selling Price Rs. 12 per unitVariable Cost Rs. 9 per unitWhat will be the profit when sales area) Rs. 60000b) Rs 100000
Solution
P/V Ratio=C/S=3/12=25%a) When Sales=Rs 60000 Contribution =Sales x P/V ratio =60000 x 25 % =Rs.15000 Profit = Contribution-Fixed Cost = 15000 – 12000 = 3000
B) Answer=Rs.13000
Problem The following information is given:Sales=Rs. 200000Variable Cost=Rs. 120000Fixed Cost=Rs. 30000Calculatea) Break Even Pointb) New BEP
a) If Selling price is reduced by 10%b) If Variable cost increases by 10%c) If fixed Cost increases by 10%
Answer
a) 75000a) 90000b) 88235c) 82500
Home work
Sales=4000 units @ Rs 10 per unit
Break Even Point=Rs. 1500 units Fixed Cost= Rs. 3,000What is the amount ofa) Variable Costb) Profit
Graphic Presentation (BEP)
Use CVP analysis for profit planning and graph the cost-volume-profit relations
Volume in Units
Co
sts
and
Rev
enu
ein
Ru
pee
s Total fixed costs
Preparing a CVP Chart
Total costs
Volume in Units
Co
sts
and
Rev
enu
ein
Ru
pee
s Total fixed costs
Preparing a CVP Chart
Total costs
Sales
Break-even Point
Margin of safety
Margin of safety Excess of expected sales over
breakeven sales. Margin of safety is a measure of
amount by which the sales may decrease before a company suffers a loss.
This can be expressed as a number of units or a percentage of sales
Formula
Margin of safety= Margin of safety Budget sales level
*100%
Margin of safety= Budget sales level – breakeven sales level
Sales revenueT
otal
Cos
t/R
even
ue
Rs.
Sales (units)
Total costProfit
BEP
Margin of safety
Example The breakeven sales level is at
5000 units. The company sets the target profit at Rs.18000 and the budget sales level at 7000 units
Required:Calculate the margin of safety in units and express it as a percentage of the budgeted sales revenue
Margin of safety= Budget sales level – breakeven sales level= 7000 units – 5000 units= 2000 units
Margin of safety= Margin of safety Budget sales level= 2000 7000= 28.6%
*100 %
*100 %
The margin of safety indicates that the actual sales can fall by2000 units or 28.6% from the budgeted level before losses areincurred.
Example
Selling price per unit Rs.12 Variable price per unit Rs.3 Fixed costs
Rs.45000 Current profit
Rs.18000
Change in Sales Price Example
If the selling prices is raised from Rs.12 to Rs.13, the minimum volume of sales required to maintain the current profit will be:
Fixed cost + Target profit
Contribution per unit
=Rs.45000 + Rs.18000
Rs.13 - Rs.3
= 6300 units
Change in Fixed and Variable Costs Example
If the fixed cost fall by Rs.5000 but the variable costs rise to Rs.4 per unit, the minimum volume of sales required to maintain the current profit will be:Fixed cost + Target profit
Contribution per unit
= Rs.40000 + Rs.18000
Rs.12 - Rs.4
= 7250 units